Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The worse the economic news, the greater the expectation of US federal stimulus, the more the market rallies. Investors may be surprised to find that recent federal stimulus discussions are more appearance than substance. The balance of the US Senate is at stake and this posturing plays right into that election.Despite the overall improved risk tone, emerging market capital inflows flattened to remain at their highest levels since mid-February. This is surprising as almost everyone expects a weakening dollar next year. This is not a good sign. So long as yields are rising due to economic growth expectations, all is good; however, if yields are rising due to increasing inflation expectations, then a market correction is inevitable as investors re-assess policymaker’s commitment. Much depends on what and how the Fed communicates. Signs of wavering from overshooting inflation targets could spark a mini-taper tantrum.While global risk sentiment strengthened, Asia’s high yield markets outperformed the US indexes. Asia’s outperformance was likely due to more encouraging news from the region in terms of November’s PMIs which went down well with increased US federal stimulus expectations. Nonetheless, Asia’s HY index still has considerable room to catch-up with the US index. This difference was at its widest level in over 10-years recently and had hit a low of 1.45pp three months ago. This volatility seems overdone. We believe this to be due to US market irrational exuberance although increased concerns on the health of China’s debt issuers also played a part. Rising expectations for the Fed to take bond-supportive policy steps and the potential for another round of fiscal stimulus also play in the market dynamics. However, the Fed may not move before knowing the outcome of the Senate elections and federal stimulus discussions may be a false dawn. As such, we continue to suggest positioning for spread compression between the US and Asia HY indexes via the US Caa-rated index level.Within this environment, Asia’s High Yield bank bonds continued to outperform, although almost all bank bond prices rose on increased risk sentiment. Asia’s lowest rated bank bonds led in terms of spread outperformance. However, a Fed-influenced cap on US longer-term rates may not be bank friendly. We caution bank investors that Fed programs are forever, so be careful what you wish for. Remember when Quantitative Easing ended?Market Outlook: The question now is whether the federal stimulus discussion is about economic or political reality. We hope that our US federal stimulus cynicism is proven incorrect. Assuming we are incorrect, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns may then weigh on the market. The recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly due to the lack of Fed action in its asset purchase program. We are now more deeply set-up for buy-the-rumor, sell-the-fact profit taking.

The worse the economic news, the greater the expectation of US federal stimulus, the more the market rallies. Investors may be surprised to find that recent federal stimulus discussions are more appearance than substance. The balance of the US Senate is at stake and this posturing plays right into that election.Despite the overall improved risk tone, emerging market capital inflows flattened to remain at their highest levels since mid-February. This is surprising as almost everyone expects a weakening dollar next year. This is not a good sign. So long as yields are rising due to economic growth expectations, all is good; however, if yields are rising due to increasing inflation expectations, then a market correction is inevitable as investors re-assess policymaker’s commitment. Much depends on what and how the Fed communicates. Signs of wavering from overshooting inflation targets could spark a mini-taper tantrum.While global risk sentiment strengthened, Asia’s high yield markets outperformed the US indexes. Asia’s outperformance was likely due to more encouraging news from the region in terms of November’s PMIs which went down well with increased US federal stimulus expectations. Nonetheless, Asia’s HY index still has considerable room to catch-up with the US index. This difference was at its widest level in over 10-years recently and had hit a low of 1.45pp three months ago. This volatility seems overdone. We believe this to be due to US market irrational exuberance although increased concerns on the health of China’s debt issuers also played a part. Rising expectations for the Fed to take bond-supportive policy steps and the potential for another round of fiscal stimulus also play in the market dynamics. However, the Fed may not move before knowing the outcome of the Senate elections and federal stimulus discussions may be a false dawn. As such, we continue to suggest positioning for spread compression between the US and Asia HY indexes via the US Caa-rated index level.Within this environment, Asia’s High Yield bank bonds continued to outperform, although almost all bank bond prices rose on increased risk sentiment. Asia’s lowest rated bank bonds led in terms of spread outperformance. However, a Fed-influenced cap on US longer-term rates may not be bank friendly. We caution bank investors that Fed programs are forever, so be careful what you wish for. Remember when Quantitative Easing ended?Market Outlook: The question now is whether the federal stimulus discussion is about economic or political reality. We hope that our US federal stimulus cynicism is proven incorrect. Assuming we are incorrect, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns may then weigh on the market. The recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly due to the lack of Fed action in its asset purchase program. We are now more deeply set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: New Equation Is Bad News = Buy

Risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan) during the month of November. In fact, only 4 securities widened in G-Spread terms out of the 100 bonds that we track in the region. Meanwhile, the largest widening was only 15 basis points (bps) month-on-month.India-headquartered bank bonds led in terms of spread tightening over November and dominate our top 10 list. Amongst the India-headquartered banks, several non-bank finance companies (NBFCs) led advances. Relative to year-end spread levels, there is limited upside remaining amongst the top 10 performers of November.In a positive sign, from a momentum perspective, the positive spread movement amongst India’s NBFCs was continuous throughout November. Coronavirus vaccine news, a Goldilocks US election outcome, and the Janet Yellen effect propelled riskier asset prices higher in most markets and India was no exception.   While the trend is your friend, ordinarily thin trading markets could meet concerns that economic recovery is fully priced, and profit-taking may ensue during December. In addition, there is the risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. Post-COVID-19, India’s operating environment starts from an already high level of non-performing assets and each bank’s loan loss predictive ability has significant room for improvement. The same could be said for the other outperforming bank bonds in our top 10 list.

Risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan) during the month of November. In fact, only 4 securities widened in G-Spread terms out of the 100 bonds that we track in the region. Meanwhile, the largest widening was only 15 basis points (bps) month-on-month.India-headquartered bank bonds led in terms of spread tightening over November and dominate our top 10 list. Amongst the India-headquartered banks, several non-bank finance companies (NBFCs) led advances. Relative to year-end spread levels, there is limited upside remaining amongst the top 10 performers of November.In a positive sign, from a momentum perspective, the positive spread movement amongst India’s NBFCs was continuous throughout November. Coronavirus vaccine news, a Goldilocks US election outcome, and the Janet Yellen effect propelled riskier asset prices higher in most markets and India was no exception.   While the trend is your friend, ordinarily thin trading markets could meet concerns that economic recovery is fully priced, and profit-taking may ensue during December. In addition, there is the risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. Post-COVID-19, India’s operating environment starts from an already high level of non-performing assets and each bank’s loan loss predictive ability has significant room for improvement. The same could be said for the other outperforming bank bonds in our top 10 list.

Bank Credit Compass: Asia’s November Performance and December Expectations

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. <a href="https://www.smartkarma.com/entities/vietnam-prosperity-jsc-bank" target="_blank" data-smartkarma-citation="entities:26914:1" rel="noopener">Vietnam Prosperity Bank (VPB VN)</a> and <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance (IIFL IN)</a>, a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-move-to-overweight-the-capital-inefficient-securities-from-buy" target="_blank" data-smartkarma-citation="insights:45652" rel="noopener">Move to Overweight the Capital Inefficient Securities, from Buy</a> for more details. In addition, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank Public (BBL TB)</a> continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a> widened 2bps. Please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> for our views. Finally, amongst Asia-centric banks, certain <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. Vietnam Prosperity Bank (VPB VN) and IIFL Finance (IIFL IN), a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the Bank of East Asia (BNKEA) complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see Move to Overweight the Capital Inefficient Securities, from Buy for more details. In addition, Bangkok Bank Public (BBL TB) continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while TMB Bank (TMB TB) widened 2bps. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views. Finally, amongst Asia-centric banks, certain Standard Chartered (STAN LN) bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

Asia and the US high yield markets tightened on improving economic indicators and increased hopes for a limited US stimulus package, respectively, as the week progressed. On Friday, a lower than expected US jobs report and volatility created by the news that US President Donald Trump had tested positive for Covid-19 capped gains from earlier in the week.In rate markets, the US Treasury curve steepened on reflation expectations and early week risk-on momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may consider a narrower stimulus bill was met with cautious optimism. We are not convinced that the failure to reach a stimulus agreement would be overly negative for risk assets in the near term, as expectations are for an agreement in the next few months.The Bloomberg index of emerging market capital inflows finished the week slightly higher. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.  Meanwhile, investors moved down the credit continuum in Asia-headquartered banks, in-line with increased risk sentiment. Investors rotated out of higher rated Tier II debt into lower rated high yield Senior Unsecured and more subordinated Additional Tier 1 (AT1) bonds.Concurrently, almost US$9 billion was raised by financial institution in USD and Euros in the form of Senior Unsecured, Tier II and AT1 bonds. This follows from over US$62 billion in bank bonds issued over the prior five weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis. In fact, examining the AT1 deals completed this week, we sense a whiff of panic by some AT1 issuers to lock-in current interest rate levels, even if disadvantageous relative to current – or past- coupon reset levels.  <a href="https://www.smartkarma.com/entities/julius-baer-group-ltd" target="_blank" data-smartkarma-citation="entities:22572:1" rel="noopener">Julius Baer (BAER VX)</a>, <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank (FAB UH)</a> and <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken Ab (SHBA SS)</a> brought AT1 bonds at questionable levels, in our view.Concerns on China Evergrande Group’s debt load dampened new issuance in Asia. However, investors were treated to two high yield Green coupon opportunities this week. Finally, Bloomberg reports that Cerberus is marketing a “re-securitization” which has the appearance of a collateralized debt obligation (CDO). The reappearance of the CDO product, which performed poorly during the global financial crisis, suggests that we may be approaching a market peak.Market Outlook President Trump’s illness changes the US election landscape. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Asia and the US high yield markets tightened on improving economic indicators and increased hopes for a limited US stimulus package, respectively, as the week progressed. On Friday, a lower than expected US jobs report and volatility created by the news that US President Donald Trump had tested positive for Covid-19 capped gains from earlier in the week.In rate markets, the US Treasury curve steepened on reflation expectations and early week risk-on momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may consider a narrower stimulus bill was met with cautious optimism. We are not convinced that the failure to reach a stimulus agreement would be overly negative for risk assets in the near term, as expectations are for an agreement in the next few months.The Bloomberg index of emerging market capital inflows finished the week slightly higher. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.  Meanwhile, investors moved down the credit continuum in Asia-headquartered banks, in-line with increased risk sentiment. Investors rotated out of higher rated Tier II debt into lower rated high yield Senior Unsecured and more subordinated Additional Tier 1 (AT1) bonds.Concurrently, almost US$9 billion was raised by financial institution in USD and Euros in the form of Senior Unsecured, Tier II and AT1 bonds. This follows from over US$62 billion in bank bonds issued over the prior five weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis. In fact, examining the AT1 deals completed this week, we sense a whiff of panic by some AT1 issuers to lock-in current interest rate levels, even if disadvantageous relative to current – or past- coupon reset levels.  Julius Baer (BAER VX), First Abu Dhabi Bank (FAB UH) and Svenska Handelsbanken Ab (SHBA SS) brought AT1 bonds at questionable levels, in our view.Concerns on China Evergrande Group’s debt load dampened new issuance in Asia. However, investors were treated to two high yield Green coupon opportunities this week. Finally, Bloomberg reports that Cerberus is marketing a “re-securitization” which has the appearance of a collateralized debt obligation (CDO). The reappearance of the CDO product, which performed poorly during the global financial crisis, suggests that we may be approaching a market peak.Market Outlook President Trump’s illness changes the US election landscape. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk Sentiment Improves Despite Volatile News Flow

Positive credit momentum was more measure in both Asia and the US as Treasuries firmed into month-end. A declining US dollar aided Asia’s positive performance while the US strengthened on accommodative Fed actions, including the extension of unconventional monetary policy actions. Concurrently, in rate markets, three-month Treasuries declined 2 basis points during the week as month-end effects catalyzed safe-haven shelter from simmering risks. These include rising U.S.-China geo-political tensions, resurgent virus activity in Asia, Europe and several U.S. states, global growth concerns and the outcome of the US election. As we move through the US election, additional downward moves in US Treasury rates may occur, given potential investor uncertainty on policy direction, post-election. One cannot rule out a return to negative short-term US$ interest rates, as occurred in mid-March.The Fed announced that it will extend temporary emergency measures launched earlier this year to ensure global access to a ready supply of U.S. dollars. Euro-dollar and Yen-dollar basis swaps reacted positively to this announcement, as did December’s FRA/OIS spread. This should place a soft ceiling on Libor levels through the end of the year. Combined with falling Treasury yields, net interest margins could rise.The Fed also announced the extension of its emergency lending programs, including the Primary and Secondary Corporate Credit Facilities (CCF) until the end of December as we projected in <a href="https://www.smartkarma.com/insights/crowding-in-and-asia-bank-credit-the-context-for-h2-expectations" target="_blank" data-smartkarma-citation="insights:40734" rel="noopener">Crowding-In and Asia Bank Credit: The Context for H2 Expectations</a>. Despite keeping its powder dry with respect to using these programs, the CCF programmes should keep pressure on credit spreads and continue to drive investors to longer duration, emerging market debt.  <a target="_blank"></a>In-line with the more measure global risk sentiment, four Asia bank bonds tightened for every one that widened during the week while India- headquartered and Hong Kong-centric banks were prevalent amongst those tightening most. The Monetary Authority of Singapore called on local banks to cap potential 2020 dividends at 60% of 2019 levels. This announcement may have raised extension risk concerns for <a href="https://www.smartkarma.com/entities/dbs-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:22:1" rel="noopener">DBS Group Holdings' (DBS SP)</a> Additional Tier 1 (AT1) bondholders. Concurrently, the European Central Bank (ECB) asked lenders to not pay dividends before next year. The ECB also advised not to buy back shares until January, and to be extremely moderate with variable compensation.  In the bank debt capital markets, Hong Kong-based <a href="https://www.smartkarma.com/entities/chong-hing-bank-ltd" target="_blank" data-smartkarma-citation="entities:344:1" rel="noopener">Chong Hing Bank (1111 HK)</a> and US-based <a href="https://www.smartkarma.com/entities/fifth-third-bancorp" target="_blank" data-smartkarma-citation="entities:152:1" rel="noopener">Fifth Third Bank (FITB US)</a> both brought AT1 bonds with coupons lower than yields on shorter callable notes. We explain the mechanics of this in <a href="https://www.smartkarma.com/insights/chong-hing-bank-at1-alchemy" target="_blank" data-smartkarma-citation="insights:41645" rel="noopener">Chong Hing Bank: AT1 Alchemy</a>.Market Outlook: Strong positive market technicals and unconventional monetary policy stimulus should help to avoid a substantial credit sell-off and continue to push risk asset prices higher. Tactically, cross-over senior unsecured may be best for defensive positioning; however, given the improved environment, higher beta senior unsecured as well as longer duration high yield and cross-over subordinated debt are better positioned for additional risk taking.Inside: In this weekly, we review the impact of this week’s Fed announcements, global credit index levels, interest rates and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Positive credit momentum was more measure in both Asia and the US as Treasuries firmed into month-end. A declining US dollar aided Asia’s positive performance while the US strengthened on accommodative Fed actions, including the extension of unconventional monetary policy actions. Concurrently, in rate markets, three-month Treasuries declined 2 basis points during the week as month-end effects catalyzed safe-haven shelter from simmering risks. These include rising U.S.-China geo-political tensions, resurgent virus activity in Asia, Europe and several U.S. states, global growth concerns and the outcome of the US election. As we move through the US election, additional downward moves in US Treasury rates may occur, given potential investor uncertainty on policy direction, post-election. One cannot rule out a return to negative short-term US$ interest rates, as occurred in mid-March.The Fed announced that it will extend temporary emergency measures launched earlier this year to ensure global access to a ready supply of U.S. dollars. Euro-dollar and Yen-dollar basis swaps reacted positively to this announcement, as did December’s FRA/OIS spread. This should place a soft ceiling on Libor levels through the end of the year. Combined with falling Treasury yields, net interest margins could rise.The Fed also announced the extension of its emergency lending programs, including the Primary and Secondary Corporate Credit Facilities (CCF) until the end of December as we projected in Crowding-In and Asia Bank Credit: The Context for H2 Expectations. Despite keeping its powder dry with respect to using these programs, the CCF programmes should keep pressure on credit spreads and continue to drive investors to longer duration, emerging market debt.  In-line with the more measure global risk sentiment, four Asia bank bonds tightened for every one that widened during the week while India- headquartered and Hong Kong-centric banks were prevalent amongst those tightening most. The Monetary Authority of Singapore called on local banks to cap potential 2020 dividends at 60% of 2019 levels. This announcement may have raised extension risk concerns for DBS Group Holdings' (DBS SP) Additional Tier 1 (AT1) bondholders. Concurrently, the European Central Bank (ECB) asked lenders to not pay dividends before next year. The ECB also advised not to buy back shares until January, and to be extremely moderate with variable compensation.  In the bank debt capital markets, Hong Kong-based Chong Hing Bank (1111 HK) and US-based Fifth Third Bank (FITB US) both brought AT1 bonds with coupons lower than yields on shorter callable notes. We explain the mechanics of this in Chong Hing Bank: AT1 Alchemy.Market Outlook: Strong positive market technicals and unconventional monetary policy stimulus should help to avoid a substantial credit sell-off and continue to push risk asset prices higher. Tactically, cross-over senior unsecured may be best for defensive positioning; however, given the improved environment, higher beta senior unsecured as well as longer duration high yield and cross-over subordinated debt are better positioned for additional risk taking.Inside: In this weekly, we review the impact of this week’s Fed announcements, global credit index levels, interest rates and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Measured Momentum into Month-End

Vietnam

Vietnam Prosperity Joint Stock Commercial Bank (VPBank) provides commercial banking services. The Bank offers domestic remittance services, savings account, personal loans, e-banking, trade financing, deposits, tax payment, foreign exchange, cash management, and other banking services. VPBank serves customers in Vietnam.

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Vietnam Prosperity Bank (VPB VN)

Bank Credit Weekly: New Equation Is Bad News = Buy

The worse the economic news, the greater the expectation of US federal stimulus, the more the market rallies. We are now more set-up for buy-the...

Hank Calenti, CFA

Bank Credit Compass: Asia’s November Performance and December Expectations

India-headquartered bank bonds led spread tightening over November. Ordinarily thin markets could meet concerns that economic recovery is fully...

Hank Calenti, CFA

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

The risk-wave caught a bid in Asia HY while positive momentum in US Caa-rated credits slowed. We are set-up for buy-the-rumor, sell-the-fact profit...

Hank Calenti, CFA

Bank Credit Weekly: Risk Sentiment Improves Despite Volatile News Flow

: Asia and the US high yield markets tightened on improving economic indicators and increased hopes for a limited US stimulus package,...

Hank Calenti, CFA

Bank Credit Weekly: Measured Momentum into Month-End

Positive credit momentum was more measure in both Asia and the US as Treasuries firmed into month-end. A declining US dollar aided Asia’s positive...

Hank Calenti, CFA

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